ICICI, HDFC end special home loans

Mumbai: ICICI Bank Ltd and Housing Development Finance Corp. Ltd (HDFC) won’t extend their special home loan schemes, taking heed of the central bank’s reservations over the so-called “teaser” rates in its 2 November monetary policy review.

The move, which brings to a halt the one-year-old practice of attracting homebuyers by offering lower rates of interest in the first few years of housing loans, also comes after six interest rate increases by the Reserve Bank of India (RBI) since January raised the cost of funds for financial institutions.

Both ICICI Bank and HDFC said on Wednesday that they will not extend the scheme beyond their 30 November deadlines. State Bank of India, however, will stick to its deadline of 31 December, by when the scheme will end.

Home loan seekers will now have to look at rates “above 9% and trending upwards in the next six to nine months”, said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd.

ICICI Bank offered a fixed rate of 8.5% in the first year, rising to 9.25% in the second. A regular floating rate would apply in the third year.

HDFC offered loans at 8.5% until March and 9.25% for one year starting April 2011, for loans applied for by 30 November.

“The cost of funds has increased for everyone in general and so we had decided sometime back that we will not extend this,” said Renu Sud Karnad, joint managing director of HDFC. “Besides, as we know, RBI is also not happy with such schemes.”

RBI had said that banks do not take into account the repaying capacity of the borrower at normal lending rates at the initial appraisal.

“This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective,” RBI had said in November.

Such loans were offered at a discount for the first two years and then rose, reflecting the bank’s real lending rate.

RBI also raised provisioning for housing loans in its last policy review, telling banks to keep aside 2% of the loan value against 0.4% earlier, also serving to make mortgage lending costlier for banks.

Nearly 20-25% of banks’ outstanding housing loan portfolio of around Rs3.4 trillion was linked to teaser rates as of 30 September, according to a report by rating agency Crisil Ltd on 3 November.

Out of HDFC’s mortgage portfolio of Rs1.06 trillion, nearly 27% is under the special loan scheme that was introduced in December 2009, Crisil had said.